How to Involve (But Not Overwhelm) Advisors in Your Product Due Diligence Processes

In a recent blog article, we presented an analysis of the magnitude and volume of significant changes to Canadian investment products over a 12-month period. While the data indicated that meeting the Client Focused Reforms (CFR) Know Your Product (KYP) obligations using a manual approach would be impossible, meeting the regulation is manageable provided the dealer deploys  shelf management technology. 

While our analysis focused on the dealer’s obligation to monitor their product shelf, the Canadian Securities Administrators (CSA) does not restrict the requirement to dealers.

The CSA’s April 29, 2022 CFR FAQ states: 

“Where any changes are significant changes (for example, a risk level change), we expect the firm to have a process in place to determine whether the change would require further steps to be taken by the firm and representatives (for example, new suitability determinations for clients and potential changes to client portfolios, or changes to the firm’s approval of the security, or controls around the sale of the security).” 

 

The CSA has an expectation on both dealer and advisor actions when a significant change has been identified. While our analysis concluded that technology makes significant change monitoring manageable for dealers, bringing advisors into the mix adds complexity to meeting the CFR requirements. This is because an advisor’s priorities and perspective of the obligation are quite different from the dealer’s. For instance: 

  1. Whose Shelf is Being Monitored?
    A dealer typically has thousands, if not tens of thousands, of approved fund codes or products available for an advisor to recommend to their clients.  If we consider an advisor has 1,000 accounts for 500 clients, she could have positions in 250 different securities which would represent less than 1% of the dealer’s shelf.Thus, extending the firm’s product monitoring information to advisors would be excessive, regardless of how small the dealer’s shelf is. Unless the firm can customize the information to each advisor’s shelf, they will overwhelm the advisor with information that is not pertinent to their book of business. As a result, taking this approach will result in very low advisor engagement or very high advisor frustration.
  2. One Size Does Not Fit All
    With the number of advisor positions being such a small percentage of the dealer’s shelf, we considered whether a firm could apply the Pareto principle to avoid the challenge of customizing a monitoring program for each advisor.  Applying the 80:20 rule would limit the advisor to only receive change information for the most “popular” products.Our analysis showed that there is little overlap amongst advisor position files from the same dealer. The degree of overlap can be as high as 30% and as low as 5%. Moreover, advisors may have positions in assets not on the approved shelf due to in-kind transfers, for example. Therefore, a program that does not monitor off-book assets or a complete list of positions managed by advisors falls short of the CSA’s guidance and would likely expose advisors and the firm to unwanted risks when significant changes go unnoticed.
  3. Not All Products are Created Equal
    In our analysis, we found that the Pareto principle did apply and approximately 80% of the advisor’s book of assets were held in 20% of the positions.  While that doesn’t necessarily reduce the volume of products that require monitoring, it is an important insight in helping advisors understand the possible level of impact a change may have. 

 

Dialing up Relevance for Advisors 

Successfully extending a KYP and product due diligence program to advisors requires increasing the relevance or personalizing aspects of the change monitoring program.   

Operationalizing the CFR How to Involve (But Not Overwhelm) Advisors in Your Product Due Diligence Processes

This infographic illustrates the potential magnitude of change data that would be presented to an advisor if she was to sift through more than 45,000 significant changes to the mutual fund and ETF universe occurring every year. Limiting the change information to only the dealer’s shelf, or one-quarter of the universe in this example still represents more than 10,000 significant changes for the advisor to manage. Monitoring only becomes feasible once firms tailor the monitoring service to each advisor’s specific holding – which is approximately 260 significant changes annually in our example scenario. 

 

InvestorCOM ShelfMonitor – Powerful Shelf Management Technology for Dealers and Advisors 

InvestorCOM ShelfMonitor now features a position-sensitive product monitoring capability that notifies advisors of the only changes they care about.  

A recent product simulation showed that advisors receive on average 1 to 5 change alerts per week. This hyper-personalized approach can be further enhanced with market value information giving advisors an effective tool to monitor and manage the impact of significant changes to their book of business. 

To see a demo of ShelfMonitor, visit https://investorcom.com/demo/   

Learn more about getting a KYP Assessment and simulation of your advisor experience. 

 

By: Dave Carr-Pries, VP Consulting Services, InvestorCOM